A Study on Receivable Management at Colorlines Clothing India Pvt. Ltd.
1. EXECUTIVE SUMMARY :The project deals in “Account Receivable Management with reference to the study of
Colorlines Clothing India Pvt. Ltd”. Receivable management is one of the most important
aspects of the organization, as it deals with the management of the outstanding. The profit of the
company mainly depends on the accounts receivables. Therefore it needs a careful analysis and
proper management.
Debtors occupy an important position in the structure of current assets of a firm. They are the
outcome of rapid growth of trade credit granted by the firms to their customers. Trade credit is
the most prominent force of modern business. It is considered as a marketing tool acting as a
bridge for the movement of goods through production and distribution stages to customers.
Till few years back, Colorlines Clothing India Pvt. Ltd. had a very strict policy of selling
against advance payments. That was an era of controlled economy. However, with an increasing
domestic and international competition, company could no longer afford this policy, in order to
maintain its premium position. Further in order to capture a greater amount of market share, it
was compelled to go by the industry norms and thus it ushered into the new era of credit sales.
This resulted in credit sales going up significantly. A credit limit was sanctioned to every
customer. The customers were required to pay the outstanding amount on the due date
This report discusses the importance of managing accounts receivable and provides proven
principles for achieving benefits such as increased cash flow, higher margins, and a reduction in
bad debt loss. The focus is primarily on commercial (business to business) receivables
management. protection against credit risks.
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A Study on Receivable Management at Colorlines Clothing India Pvt. Ltd.
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A Study on Receivable Management at Colorlines Clothing India Pvt. Ltd.
2. INTRODUCTION:Meaning of Account receivables
Accounts receivable is an accounting transaction which deals with the billing of customer who owes
money to a person, company or organization for goods and services that has been provided to the
customers. In most business entities this is typically done by generating an invoice and mailing or
electronically delivering it to the customer, who in turn must pay it within an established timeframe
called credit or payment terms.
Definition of Account receivables
The term receivable management is defined as “debt owed to the firm by customer arising from
the sale of goods/ services in the ordinary course of business.” The receivable represents an
important component of the current assets of the firm. Receivables may be known as accounts
receivables, trade creditors or customer receivable. When a firm its products / services and does not
receive cash for it immediately, the firm has said to be granted trade credit to the customers. Trade
credit thus creates receivable / book debts, which the firm is expected to collect in near future.
Accounts receivable are thus amounts due from customers, which bear no interest in essence, a
company is providing no cost financing to the customer to encourage the purchase of the company’s
product/services.
Objective of receivable management
“To promote sales and profit until that point is reached where the return on investment in
further funding of receivable is less than the cost of funds raised to finance that additional
credit(i.e. cost of capital)”
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IMPORTANCE OF RECEIVABLES MANAGEMENT :It can be argued that revenue generation is the most critical function of a company. Dot-com
companies that created exciting new products but failed to generate significant revenue burned
through their cash and ceased operating. Every company expends substantial resources to
generate increasing levels of revenue.
However, that revenue must be converted into cash. Cash is the lifeblood of any company.
Every Rupee of a company’s revenue becomes a receivable that must be managed and collected.
Therefore the staff and processes that manage your receivables asset:
•
Manage 100% of company’s revenue.
•
Serve as a service touch point for virtually all the customers of Company
•
Can incur or save millions of dollars of bad debt and interest expense.
•
Can injure or enhance customer service and satisfaction, leading to increases or decreases in
revenue.
If increasing revenue, enhancing customer satisfaction, and reducing expenses are important to
you, read on.
The benefits of effectively managing the receivables asset are:
•
Increased cash flow
•
Higher credit sales and margins
•
Reduced bad debt loss
•
Lower administrative cost in the entire revenue cycle
•
Decreased deductions and concessions losses
•
Enhanced customer service
•
Decreased administrative burden on sales force
These benefits can easily total millions in profit and tens of millions of cash flow in a year.
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Determinants of accounts receivable/credit sales1. Credit sales volume
2. Credit policies
3. Business terms- time period, discounts
4. Competition
5. Cost of receivables/trade credits6. Carrying cost
7. Defaulting cost
8. Administration Cost
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3. INDUSTRY PROFILE
Industry Structure
The textile and apparel industry is one of the largest segments of India’s economy,
accounting for 20 percent of total industrial production and slightly more than 30 percent of
total export earnings. It is also the largest employer in the manufacturing sector with a
workforce of some 38 million people. In addition, millions of others rely on the textile and
apparel industry for their livelihoods, especially those involved in cotton production. This
chapter examines the structure of India’s textile and apparel industry, from fiber production to
textile and apparel manufacturing, and concludes with an overview of its textile machinery
industry, the major source of equipment for the country’s textile and apparel industry.
The textile and apparel industry is one of the leading segments of the Indian economy and the
largest source of foreign exchange earnings for India. This industry accounts for 4 percent of the
gross domestic product (GDP), 20 percent of industrial output, and slightly more than 30
percent of export earnings. The textile and apparel industry employs about 38 million people,
making it the largest source of industrial employment in India. The study identifies the
following structural characteristics of India’s textile and apparel industry:

India has the second-largest yarn-spinning capacity in the world (after China), accounting
for roughly 20 percent of the world’s spindle capacity. India’s spinning segment is fairly
modernized; approximately 35 to 40 percent of India’s spindles are less than 10 years old.
During 1989-98, India was the leading buyer of spinning machinery, accounting for 28
percent of world shipments. India’s production of spun yarn is accounted for almost entirely
by the “organized mill sector,” which includes 285 large vertically-integrated “composite
mills” and nearly 2,500 spinning mills.

India has the largest number of looms in place to weave fabrics, accounting for 64 percent
of the worlds installed looms. However, 98 percent of the looms are accounted for by
India’s power loom and handloom sectors, which use mostly outdated equipment and
produce mostly low-value unfinished fabrics. Composite mills account for 2 percent of
India’s installed looms and 4 percent of India’s fabric output.
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
The hand loom and power loom sectors were established with government support, mainly
to provide rural employment. These sectors benefit from various tax exemptions and other
favorable government policies, which ensure that fabrics produced in these sectors are price
competitive against those of composite mills.

The fabric processing (dyeing and finishing) sector, the weakest link in India’s textile
supply chain, consists of a large number of small units located in and around the power
loom and handloom centers. The proliferation of small processing units is due to India’s
fiscal policies, which favor small independent hand- and power-processing units over
composite mills with modern processing facilities.
The production of apparel in India was until recently, reserved for the small-scale industry (SSI)
sector, which was defined as a unit having an investment in plant and machinery equivalent to
less than $230,000. Apparel units with larger investments were allowed to operate only as
export-oriented units (EOUs). As a result, India’s apparel sector is highly fragmented and is
characterized by low levels of technology use.
Competitive Position of India’s Textile and Apparel Industry
India’s share of global exports of textiles and apparel increased from 1.8 percent in 1980 to 3.3
percent in 1998. However, India’s export growth was lower than that of most Asian countries
during that period. The study identifies a number of competitive strengths of the Indian textile
and apparel industry:

India has a large fiber base, and ranks as the world’s third-leading producer of cotton,
accounting for 15 percent of the world’s cotton crop. India produces a wide variety of
cotton, providing operational flexibility for domestic textile producers. In the manmade
fiber sector, India is the world’s fifth-largest producer of polyester fibers and filament yarns
and the third-largest producer of cellulosic fibers and filament yarns.

India is the world’s second-largest textile producer (after China), and is diversified and
capable of producing a wide variety of textiles. The spinning segment is fairly modernized
and competitive, accounting for about 20 percent of world cotton yarn exports.

India’s textile and apparel industry benefits from a large pool of skilled workers and
competent technical and managerial personnel. India’s labor is inexpensive; hourly labor
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costs in the textile and apparel industry average less than 5 percent of those in the U.S.
textile and apparel industry.
The study also identifies the competitive weaknesses that have impeded the growth of India’s
textile and apparel industry:

Policies of the Government of India (GOI) favoring small firms have resulted in the
establishment of a large number of small independent units in the spinning, weaving, and
processing sectors. Sources in India claim that GOI policies have provided competitive
advantages for the small independent units over the generally larger composite mills,
discouraged investments in new manufacturing technologies, and limited large-scale
manufacturing and the attendant benefits of economies of scale.

Sources in India also claim that because of the GOI policies, small units have significantly
lower production costs than the composite mills, use low levels of technology, and produce
mostly low value-added goods of low quality that are less competitive globally.

India’s textile industry depends heavily on domestically produced cotton. Almost two-thirds
of domestic cotton production is rain fed, which results in wide weather-related fluctuations
in cotton production. Moreover, the contamination level of Indian cotton is among the
highest in the world. According to sources in India, the cotton ginning quality is poor,
contributing to defective textile products.

The GOI policy reserving apparel production for the SSI sector had restricted the entry of
large-scale units and discouraged investment in new apparel manufacturing technologies. As
a result, most Indian apparel producers do not benefit from economies of scale.

The competitiveness of India’s apparel sector is adversely impacted by an inadequate
domestic supply of quality fabrics. Fabric imports are subject to high duty rates and other
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domestic taxes that increase the cost of imported fabrics. Another major weakness of the
Indian apparel sector is a lack of product specialization which, along with a limited fabric
base, has limited India’s apparel production and exports to low value-added goods.
 India has high energy and capital costs, multiple taxation, and low productivity, all of which
add to production costs. As a result, textile and apparel products from India are less
competitive than those of China and other developing countries in the international market.
Government Policies Affecting the Industry
As India steps into an increasingly liberalized global trade regime, the Government of India has
implemented several programs to help the textile and apparel industry adjust to the new trade
environment. On November 2, 2000, the GOI unveiled its National Textile Policy (NTP) 2000,
aimed at enhancing the competitiveness of the textile and apparel industry and expanding
India’s share of world textile and apparel exports to 10 percent by 2010 from the current 3percent level. The study identifies the following measures taken by the GOI to achieve these
objectives:

Under the NTP 2000, the GOI removed ready-made apparel articles from the list of products
reserved for the SSI sector. As a result, foreign firms may now invest up to 100 percent in
the apparel sector without any export obligation.

On April 1, 1999, the GOI implemented the Technology Up gradation Fund (TUF) to spur
investment in new textile and apparel technologies. Under the 5-year $6 billion program,
eligible firms can receive loans for upgrading their technology at interest rates that are 5
percentage points lower than the normal lending rates of specified financial institutions in
India. According to GOI officials, this interest rate incentive is intended to bring the cost of
capital in India closer to international costs.
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
To boost exports and encourage new industry investment, the GOI under the quota
entitlement policy increased the share of quotas earmarked for units investing in new
machinery and plants

To promote modernization of Indian industry, the GOI set up the Export Promotion Capital
Goods (EPCG) scheme, which permits a firm importing new or secondhand capital goods
for production of articles for export to enter the capital goods at preferential tariffs, provided
that the firm exports at least six times the c.i.f. value of the imported capital goods within 6
years. Any textile firm planning to modernize its operations had to import at least
$4.6millionworth of equipment to qualify for duty-free treatment under the EPCG scheme.
In an effort to spur investment in the textile industry, on April 1, 1999, the GOI reduced the
amount to $230,000 and eliminated preferential treatment for imports of secondhand
equipment under the EPCG scheme.
Growth & Opportunities of Industry
India, with a population of 1 billion people, has a huge domestic market. India’s middle class,
currently estimated at 200 million, is projected to expand to include nearly half the country’s
total population by 2006. Based on purchasing power parity, India is the fourth-largest economy
in the world, has the third-largest GDP in the continent of Asia, and is the second-largest
economy among emerging nations. India is also one of the fastest growing economies of the
world. Although the disposable income of the majority of the Indian population is low, as the
Indian economy grows, more consumers will have greater discretionary income for clothing and
other purchases after meeting their basic needs.
India’s huge domestic market offers the prospect of significant growth opportunities in domestic
textiles and apparel consumption, which is expected to result in increased trade and foreign
investment, especially in certain product sectors. According to a 1999 study, the major growth
areas for trade and foreign investment in India will be technical textiles (e.g., fabrics used in
aerospace, marine, medical, civil engineering, and other industrial applications), home textiles,
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and apparel. The S.R. Satyam Expert Committee (SEC), constituted by the GOI, also identified
these sectors as having the greatest growth potential and recommended various measures to
promote these sectors. The staff research study highlights the following areas where foreign
firms can potentially enter the Indian market:

Demand for nonwoven textiles has been growing with increasing domestic affluence,
growing health consciousness to use more disposable clothes, and the cost effective
production of synthetic fibers in India. The liberalization of the Indian economy has created
opportunities to import machinery and technology at preferential tariffs and enter into joint
venture arrangements with foreign firms.

The technical textiles market in India has grown due to strong demand for automotive
fabrics. India’s goal is to achieve an output level of $6 billion (10 percent of world output)
in technical textiles by 2005. The GOI plans to provide incentives and tax concessions for
this sector to attract foreign investment.

India’s home textiles market is dominated by the handloom and power loom sectors, which
cater primarily to the low end of the market. The handloom sector is highly price
competitive in terry towels and for home furnishings. The power loom sector is price
competitive in bed sheets. The composite mill sector dominates the branded market, which
is relatively small. Demand for branded and quality home textiles has increased recently
with increasing affluence among the Indian population. Opportunities exist for the
introduction of quality branded products into this growing market.

India supplies 8 percent of the global demand for denim fabric. Per-capita denim
consumption in India is estimated at 0.1 meter, about one-fifth of the global average.
Domestic demand is expected to increase with the accelerated growth in the Indian economy
and increased consumer spending on clothing. Capacity utilization of the Indian denim
sector currently averages 50 to 60 percent. The deregulation of apparel production from the
SSI sector under the NTP 2000 is expected to encourage large apparel firms to enter the
Indian market, thereby spurring domestic demand for denim.

Opportunities exist for U.S. apparel producers to enter the Indian market through licensing
and joint ventures with local firms. The recent GOI decision to deregulate apparel
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production is expected to help foreign firms establishing a large production base in India
without any export obligation
Textile Market Profile
India is the world’s fourth-largest economy, the third-largest in Asia, and the second-largest
among emerging nations.88 The Indian market reflects considerable diversity in income levels
and lifestyles. Although India’s per-capita GDP is one of the lowest among the developing
countries, a significant segment of the population (an estimated 200 million people) has
significantly higher income. 1998 study by the National Council of Applied Economic Research
(NCAER) projects that India’s middle class will expand to include nearly half the country’s
total population by 2006. The same study projects that the rich and the middle income class
together will increase from 29.6 million households in 1997-98 to 97.1 million households in
2006-07. According to a recent article in The Strategist, Indian consumer credit is growing by
35 to 40 percent annually; new cardholders are increasing by 25 to 30 percent annually.90
Buying has become a year-round phenomenon in India; seasonal demand has gradually
disappeared from the Indian market in just the past 5-10 years.
Nearly 70 percent of the Indian population lives in rural areas. While both rural and urban
markets are growing significantly, the rural market is estimated to be growing twice as fast as
the urban market. According to the NCAER study, the rural share of total consumer purchases
rose from 54.2 percent in FY 1989-90 to 57.9 percent in FY 1995-96. A number of factors have
fueled consumer spending growth, including rising prosperity and the emergence of a thriving
consumer finance business. According to another NCAER study, Indian Demographics Report
1998, consumer references have shifted from low-valued items toward the higher priced
products.
The size of the Indian market for consumer durables is estimated at 100 million people,
according to a recent survey by KSA-Techno park covering some 7,300 consumers in 12 major
cities in India.95 The Indian market for branded products such as jeans, trousers, shirts, and
other consumer goods is estimated at no larger than 40 million consumers. Indian consumers are
typically more loyal to their stores than to brands. About three-fourths of the survey respondents
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reported that they would revisit the stores where they had previously purchased apparel. The
survey also revealed that brand is the second most important factor in purchase decisions. In
south India, consumers are generally more brand loyal than consumers from the north. Price,
however, is the most important factor for the consumers in east India.
Apparel Market
The Indian market for domestic readymade apparel is estimated at $5.5 billion (Rs200
billion) to $8 billion (Rs300 billion) annually.101 Trade sources estimate that menswear
accounts for 25 percent of the readymade apparel market (by quantity); women’s wear, 48
percent; and children’s wear, 17 percent.102 Approximately 20 percent of the apparel produced
in India consists of branded ready-to-wear garments.103 Brands are more prominent in
menswear, particularly shirts, trousers, and jackets.104 Most national and regional brands are
supplied by the large organized apparel firms.
The Indian market for readymade woven garments expanded 38 percent by quantity and 94
percent by value during 1992-96, whereas the market for knit garments expanded 7 percent by
quantity and 68 percent by value, reflecting the improvement in quality and a change in product
mix. Cotton is the primary material in women’s blouses and petticoats, while polyester-cotton
blends are dominant for most other goods.
Leading Players in Textile & Garment Industry in India.
1. Reliance Textiles
2. Arvind Mills
3. Raymond Ltd.
4. Century Textiles
5. Morarji Mills.
6. Vardhman Group
7. Bombay Rayon Fashions Ltd.
8. Ginni Filaments
9. Mafatlal Textiles
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10. Modern Group
11. Ashima Syntex
12. KG Denim
13. Alok Textiles
14. Gokaldas Exports
15. Shahi International
16. Gokaldas Images
17. UDG
18. Jockey
19. Birla Group
20. NSL Textiles
21. Bhaskar Denim
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4. COMPANY PROFILE
Business Summary
Color Lines Clothing India Pvt. Ltd. manufactures and exports high-quality children's
clothing. It Backed by 26 glorious years of experience in Kids garments making, Colorlines is
the 6rd largest kids garment making company with an existing annual output capacity of 50 lakh
pieces garments Per Annum. Established in 1988, Colorlines Clothing India has 12
manufacturing units in Bangalore.
The Idea and Origin of Colorlines Clothing India Pvt Ltd
When Ms.Bela Katrak (Founder & Managing Director of company) moved to Bangalore in
1988 with two young children, she could not find ready-to-wear clothes that were affordable,
durable and comfortable. "All I saw in the market was fussy, over-adorned, highly embroidered
stiff clothes," she recalls. "I figured that if I was in the situation so were a whole lot of other
moms." After investing over 40 lakh opening a retail store selling high-quality cotton kids
clothes, Bela was forced to concede: she was wrong.
"I realized that India was at that time not ready for an 'all cotton' children's store because
cotton was difficult to maintain vis-a-vis polyester," explained Ms. Bela Katrak.
Ms.Bela Katrak, a consummate entrepreneur, knew that she wanted to make high-quality
kids clothes, and if India wasn't ready, then manufacture to export was her only alternative.
With that thought, her business was reborn.
The Opportunity / Growth & Development of the Organization
However, while the international markets were ready to purchase, in the beginning Bela was
not quite equipped to deliver. "I had to learn to set up systems. So I took job work from existing
garment manufacturers and learned from them what the systems were."
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Once she got the systems right, Bela traveled to Australia to cold call buyers. "Every call I
made was put down," she recalls. Finally Bela decided to simply walk into a customer's office,
instead of calling ahead. "And that is how I broke through with one group," she says. "This was
Target chain of stores, which was one of the leading exporters of Australia."
The firm's customer base includes clothing retailers and buying houses that stress quality over
quantity. "Our customers usually have over 100 stores spread over as many countries," says
Ms.Bela.
Their customers' need for smaller runs provides a good niche for Bela, and keeps her
competitive in an increasingly mass-manufacture world. "We prefer to coordinate numerous
orders with smaller runs rather than a small number of orders with larger runs. This gives us
experience with a wide variety of products and styles," explains Bela.
Color Lines is also unique in India in that the company "provides high fashion for little
ones, keeping safety and quality in mind as their skin is more sensitive to the dyes and textures
of fabrics and trims," says Bela.
Color Lines has its own in-house design team and studio working closely with buyers to
provide garments that are both high-quality and economically viable. "We are often presented
with high fashion adult wear from international designers and asked to convert the concept into
a children’s wear to be sold on High Street." Color Lines remain the only export house in India
that deals almost exclusively in children's wear.
The Capital
Bela, like many entrepreneurs, turned to friends and family for capital, after having been turned
down by banks. "I had a business idea and they had the faith that I could carry it through. Their
faith in me was the most important factor in raising my initial money," she says. The amount
she borrowed was Rs 50,000.
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The Team and Organizational Structure
Early experience crystallized Ms.Bela's entrepreneurial streak. While in school, she noticed that
everyone wanted the wildly colored glittery pencils that aunties and uncles brought from
abroad. So she went home bought some Indian pencils, scrapped the paint off them, redecorated
them with glitter, colors and stickers and peddled her wares at school. "That first fifty that I
made was the most important of my life. It showed me what I was capable of and cemented my
entrepreneurial attitude for life."
Building on that spirit, Bela began Color Lines along with a business partner and a core team of
five people. While she and her partner have parted ways, the remaining founding team members
have grown with the company. "Our head of retail started with me ten years ago at Rs. 12 a day
and now he heads an entire sector of the company," Bela smiles.
Present & Future status of the Company
"Initially the Company started as a 40 machine small scale factory that in a few short years grew
into multiple factories with top of the line technology and thousands of employees. The firm
today employs over 4000 people.
Color Lines has established itself with top international buyers. The company is still dealing
with C&A one of their earliest customer providing them clothes for their baby, toddler and
Disney teams.
"Making ten or even five year plans can be kind of risky in our business as the playing field
changes regularly," says Bela about Color Lines' future.
The company has a 3rd largest garment laundry (washing) unit in the South India, The Company
also has proposed three new units at Integrated Textile apparel park at Bangalore with
additional capacity of 25 lakh pieces production. Colorlines through its joint venture with
Baboosh Brand it has also entered the Retail outlet market in Bangalore.
Colorlines Clothing India Private Limited, a well known name for manufacturing & Exports of
Kids garment, it also manufactures and sells fancy kids garments under the brand name
“Baboosh” at wholesales outlets. The firm now plans to venture into Other capital cities of
India.
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However, Bela is planning to grow. Since many exporters are leaving the trade, Bela want to
take advantage of the dearth of Indian suppliers to expand. "We choose to remain exclusively an
export unit and are planning on opening up a few more factories in the next year that will have
more technological advancements systems that immediately improve productivity,"
"I worry whether the appreciating rupee will make India too expensive as a supplier for
textiles in general. One can supply to foreign retail stores but if the buyers desert India and
move elsewhere to obtain the product at a cheaper rate, it can't be helped. However, export of
textiles and garments has been a long-standing tradition here and when one is open to working
with the buyers to reach mutually beneficial solutions there really is no need for worry," Ms.
Bela Katrak concludes.
The company exports 80% of the produced garments to different countries of the World, the
company’s annual turnover above Rs.100 crores.
Below are their customers and the volume of business in terms percentage
Sl
No.
Name of Buyer/Customer
Business
Volume %
1.
C&A
45%
2.
Mother Care,
15%
3.
Mexx,
10%
4.
TU Sainsbury
8%
5.
ESPRIT,
6%
6.
Marks & Spencer
5%
7.
Levi’s
4%
8.
Debenhams
4%
9.
Primark
2%
10.
H&M
2%
Table 1: List of Customers of Company
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Clothing is one of the strongest human desires. A desire to be different, A desire to look
beautiful, A desire to be comfortable, A desire to make a statement. A desire that is fulfilled by
that perfect piece of fabric called “Colorlines” Woven with passion, our fabrics speak a story of
novelty. Colorlines has grown phenomenally and the reason has been our customers. Inspired
towards betterment, we now possess the entire know how and technology for yarn dyeing,
fabric weaving, processing and garment manufacturing
Company Mission
“Achieve profitable growth through Innovation, Quality, Consistency and Commitment”
Company Vision
“To be a globally reputed apparel manufacturer, evoking distinctive recognition for
Product, Performance, Processes and People”
Goals of the Company
The Company goal is to provide the shortest turn-around time in production and supply and
strive towards better employee work culture, 100% customer satisfaction and stronger supplier
and stakeholder relations.
Company Policy
“Team work, trust, communication, honoring commitments, challenging others and goal
orientation are the behaviors that we demonstrate in the company. In addition to these, to keep
pace with the fast changing environment, we foster a culture of embracing change on a
continuous basis”
Awards & Recognitions
Best exporters Award from AEPC
Best Vendor of the year rated by C&A & Mothercare
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Now going ahead with the project the firm wants a Receivables Management analysis to be
conducted for its all customer for the smooth collection of funds. This report deals with the
Receivable management analysis for the firm.
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Mc Kinezys 7’s Framework
The Model starts on the premise that an organization is not just structure but consists of
seven elements.
Walterman have been consultants at MCV Kinezys and company at the time the seven’s
model is better known as Mc. Kinezys 7’s. This is because the two persons who developed this
model. Tom peters and Robert published their 7’s model in their article “Structure is not
organization”(1980) and in their books “The Art of Japanese management” (1981) and “In
search of Excellence” (1982)
Those seven elements are distinguished in so called hard S’s. The hard elements are feasible
and easy to identify. They can be found in strategy statements corporate plan’s organizational
charts and other documentations
The 4 steps S’s however are hardly feasible. They are difficulty to describe since
capabilities, values and elements of corporate culture are continuosly developing and changing.
They are highly determined by the people at work in organization. Therefore it is much more
difficult to plan or to influence. The characteristics of the soft elements although the soft factors
are below the surface they can have a great impact of the hard structures, strategies and system
of the organizations.
Description:
The 3 Hard S’s:
 Strategy:
The Colorlines Clothing India Pvt. Ltd started in 1986 in Bangalore rural. The main aim of
the company will be producing good quality of garments to the new born babies and kids as
well as providing more number of employments and increase standard of living of the people.
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The Colorlines Clothing India Pvt Ltd. Company philosophy is based on three core values;
they are Operational excellence, Customers focus and product leadership.
The bsiness Strategy emphasizes the following.
1. Increase their market shares
2. Reduced cost of procudtion
3. Increase company performance
4. Produce always quality product
5. To meet social responsibilities
6. Provide employment opportunity to the people of the area
7. Meet the national and International demand of Clothes
8. Reduce the import of clothes from the foreign market.
 Strucure:
Organization structure is the skeleton of whole organization. It refers to the relatively move
organizational arrangements and relationships. Arrangement about relationship, how an
organizational member communicate with other members.
Colorlines has a good organization structure when the order is passed towards top level
management to their subordinates in the organization.
 Systems:
The management belives in the utilization of cutting edge technology to deliver world class
products and services. The company has made huge investment in technological resources to
ensure that products are superior and the service delivery in terms of theses products offering
standard. The system of the Colorlines Clothing India Pvt Ltd company clearly shows the
formal processes and procedures used to manage the organization, including the control
system, performance management measurement and reward system, planning budgeting and
information system, They follow the bottom to top approach in decision making.
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The 4 Soft S’s
 Style
The management believes in an open organization in the company, they do not involve
employees for taking any decision. The management will be taking the decision itself it may be
in any area like production decision, merchandizing/marketing decision. Management itself
takes all finance decisions.
Example: In finance department, If any decision are to be taken only by the top management.
Managing Director
Executive Director
Finance Manager
 Staff:
The staff of the Colorlines is very good, they have been assigned with their responsibility
and the staff member knows the responsibility well and they are always working up their
potential to achieve the organizational objective.
In case of vacancies or in case of appointing from outside, Colorlines recruit people by
advertizing in the outdoor banners about the vacancies. In the interview final selection is done
if the person is found capable of doing the job and he will be appointed and trained under the
concerned department for the period of 3 months.
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 Skills:
The employees working here have got enough skill to achieve the organization
objective. If the top management feels that the skills of workers are not up to the potential
that is to achieve organization objective, that particular worker will be trained in such a way
that he/she will work effectively and efficiently. Here all the workers and staffs are working
in general shift only i.e., from 9.30 am to 6pm
 Shared Values:
Shared values are the values shared by the members of an organization.
The values shared by the Colorlines members are;
1. Empowerment of working force
2. Continious innovation to improve the quality and design of product.
3.
Installing a sense of responsibility in each employee.
4. Focus on and belief in employees.
5. Open culture
6. Additional benefits given by the company to its employees.

Dearness Allowances

HRA

Hospital and Medical benefits

Housing facility to staff
7. Spirit of accepting challenges.
8. Concern for performance.
9. Delivering quality service.
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Chart 1: Mc Kinezys 7’s Framework
STRUCTURE
STRATERGY
SYSTEMS
SHARED
VALUES
SKILLS
STYLE
STAFF
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Management:
The key technical members of the team are:

Ms. Bela Katrak – Managing Director (Founder of Company)

Ms. Ayesha Katrak – Executive Director

Mr. Adil Katrak – Executive Director

Ms. Rinti – General Manager Merchandizing

Mr. Amit – CEO Planning Production

Mr. Manoj – Sr. Manager Accounts Finance & Admin

Mr. Dinesh – Sr. Manager Sourcing and Purchase
Chart: 2 Organizational Structures
MANAGING DIRECTOR
EXECUTIVE
DIRECTOR 2
EXECUTIVE
DIRECTOR 1
R&D
HRD
DOMESTIC MKTG
Merchandizing
PRODUCTION
Quality Control
EXPORTS
ACCOUNTS
&
FINANCE
SOURCING
PURCHASE
STORES
SUPERVISARY STAFF
&
OPERATIONAL WORKERS
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5. RESEARCH METHODOLOGY
Statement of the Problem
Objectives of the Study
Sources of data:
Primary data:
Primary data regarding the nature and method of working of the company was collection through
informal interviews and discussion with the employees and senior officials.
Secondary data:
Secondary data required for the analysis purposes were obtained through secondary sources
consisting of published annual reports, websites and various internal records of the company.
Techniques Used for Analysis
Tecnique used is Ratio analysis which is one of the powerful tools of financial analysis. In financial
analysis is a ratio is used as benchmark for evaluating the financial position and performance of
firm.
Limitations of the study
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6. FINANCIAL ANALYSIS
The financial or accounting figures sound in the financial statements is dump. Howevver they may
tell a vivid story of the financial adventures of an enterprise, if analyzed.
In the words of Garrison “Without financial statements analysis, the story that key
relationship and trends have to tell may remain buries in a sea of statement detail.
Data Analysis and Interpretation
Profit and Loss Account for the year ended 31st March 2011
Particulars
Schedule
As at 31st March 2011
As at 31st March 2010
INCOME
Sales
Other Income
EXPENDITURE
Consumption of Materials
Operating & other Expenses
Financial Charges
Depreciation
Priliminary Expensess written off
Total
Profit Before Taxation
Provision for Taxex
14
15
16
17
5
13
- Income Tax (Rs.10,83,277 relates to pre yr)
- Fringe Benefit Tax
654,897,757
68,002,344
722,900,101
193,111,811
359,128,271
13,254,470
12,400,786
577,895,338
8,477,959
258,069,090
395,802,542
15,778,419
12,159,051
230,472
682,039,574
40,860,527
4,325,822
- Deferred Tax (Credit)
Prior Year Expenses
Profit After Taxation
Balance of Profit Brought Forward
Earning per Share [Equity shares, par value
Rs.10 each]
- Basic & Diluted
Weighted average number of shares used in
computing earning per share
- Basic & Diluted
Notes to Accounts
538,119,664
48,253,633
586,373,297
2619689
17,513,988
672,390
(22,945)
242,304
3,932,778
26,431,105
(212,178)
388,000
22,498,327
22,498,327
1.12
11.24
3,500,000
2,001,616
18
Table:2 Profit & Loss Account of Colorlines Clothing india Private Ltd.
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Particulars
COLORLINES CLOTHING INDIA PRIVATE LIMITED
BALANCE SHEET AS ON 31st March 2011
Schedule
As at 31st March 2011
SOURCES OF FUNDS
Share holders Funds
Share Capital
Reserves & Surplus
Loan Funds
Secured Loans
Unsecured Loans
1
2
35,000,000
26,656,106
35,000,000
22,723,326
3
4
123,899,475
9,508,748
128,132,414
3,153,112
195,064,329
189,008,852
Total
APPLICATION OF FUNDS
Fixed Assets
Gross Block
Less: Depreciation
As at 31st March 2010
5
94,987,585
24,138,907
70,848,678
Deferred Tax Assets
6
1,403,621
Current Assets, Loans &
Advances
Inventories
7
60,313,730
Sundry Debtors
8
68,772,419
Cash & Bank Balance
9
23,253,579
Loans & Advances
10
65,316,802
Total Current Assets
217,656,530
Less:- Current Liabilities
11
90,042,276
Less:- Provisions
12
4,802,225 122,812,029
Net Current Assets
Miscellaneous Expenditure
13
(To the extent not written off)
TOTAL
195,064,328
Notes of Accounts
18
The schedules reffered to above form an integral part of Balance Sheet
89,395,718
12,159,051
77,236,667
1,380,676
39,520,400
98,638,254
45,917,081
52,157,168
236,232,903
108,830,956
17,010,438
110,391,509
189,008,852
Table 3: Balance sheet of Colorlines Clothing India Pvt Ltd for the financial year 2009-10 & 2010-2011
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COLORLINES CLOTHING INDIA PRIVATE LIMITED
Schedule to Balance Sheet
As at 31st March 2011
Particulars
1. Share Capital
i. Authorised Capital :40,00,000 Equity Shares of Rs.10 each
As at 31st March 2010
40,000,000
40,000,000
ii. Issued, Subscribed & Paidup Capital:35,00,000 Equity shares of Rs.10 each Fully Paid up
Total
35,000,000
35,000,000
35,000,000
35,000,000
225,000
225,000
22,498,326
3,932,779
26,431,105
26,431,105
22,498,326
22,498,326
22,498,326
26,656,105
22,723,326
121,398,040
2,501,435
120,923,165
7,209,249
123,899,475
128,132,414
9,508,748
3,153,112
9,508,748
3,153,112
2. Reserves & Surplus
a. Securities Premium Account
b. Profit & Loss Account
Opening balance brought forward
Add: Profit transferred during the year
Less: Withdrawn/Transferred
Balance Carried Forward
Total (a+b)
3. Secured Loans
Working Capital from Banks
Term loan from bank
Total
4. Unsecured Loans
Interest free loan from directors
Total
Schedule - 5 : Fixed Assets
GROSS BLOCK
Particulars
Building Lease
holding
Value as at
01.04.2010
Addnduring
the year
DEPRECIATION
Deletion
during
the year
Bal as at
31.03.2010
Balnce as at
01.04.2010
For the
year
677,833
1,533,801
-
2,211,634
67,783
88,183
Plant &Machinery
59,322,897
1,021,886
854,409
59,490,374
6,850,492
7,362,978
NET BLOCK
Deletion
during the
year
Bal. as at
31.03.2011
As at
31.03.2011
As at
31.03.2010
155,966
2,055,668
610,050
296,204
13,917,266
45,573,108
52,472,405
Computers
1,452,751
996,357
-
2,449,108
518,027
449,221
967,248
1,481,860
934,724
ElectricalInstallation
9,181,650
459,441
27,513
9,613,578
1,038,145
1,152,542
369
2,190,318
7,423,260
8,143,505
Equipment
2,076,247
883,375
-
2,959,622
305,126
321,235
-
626,361
2,333,260
1,771,121
Furniture & Fixtures
10,297,976
393,392
-
10,691,368
1,726,047
1,580,749
-
3,306,796
7,384,572
8,571,929
Motor Vehicles
6,386,364
1,303,774
118,236
7,571,902
1,653,430
1,394,197
72,676
2,974,951
4,596,951
4,732,934
TOTAL
89,395,717
6,592,026
1,000,158
94,987,585
12,159,051
12,349,106
369,249
24,138,907
70,848,678
77,236,666
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Particulars
7. Inventories
Raw materials
Work in progress
Finished goods
Goods in Transit
Total
8. Sundry Debtors
Considered Good
Considered doubtful
Sub total
Less: Provision for doubtful debts
Sub total
Others - Considered Good
Total
9. Cash & Bank Balances
Cash in hand
Balances with Scheduled banks:
In current Account
In Deposit Account
Total
10. Loans & Advances
Advances to Vendors
Duty Drawback Receivable
Advance/Refund receivable from statutory bodies
Advance Income Tax
Other Advances & Receivables
Total
11. Current Liabilities
Sundry Creditors (due to small & medium
enterprises)
Others
Due to directors
Other Liabilities
12. Provisions
Provisions For Taxation (net of advanct tax)
Provision for leave salary
Provision for gratuity
Total
Karnataka State Open University, Mysore
As at 31st March 2011
As at 31st March 2010
32,795,287
11,046,494
16,471,949
60,313,730
24,709,658
10,270,429
3,203,984
1,336,329
39,520,400
127,972
68,644,447
68,772,419
471,728
471,728
471,728
98,166,526
98,638,254
97,332
105,083
6,730,169
16,426,079
23,253,580
31,300,464
14,511,534
45,917,081
6,662,349
7,928,277
4,134,496
3,239,105
43,352,575
65,316,802
4,091,796
8,961,795
4,002,399
35,101,178
52,157,168
127,972
41,992
169,964
41,992
51,600,643
38,441,633
(3,239,104)
1,381,596
3,420,629
90,042,276
4,802,225
94,844,501
1,990,497
66,614,860
9,000,000
31,225,599
12,314,557
1,275,252
3,420,629
108,830,95
6
17,010,438
125,841,39
4
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Particulars
2009-10
2010-11
Inventories
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7. RECEIVABLES ANTECEDENTS
Receivables antecedents are defined as all the up-front operations required to create a
receivable. They include:
• Quotation
• Contract and pricing administration
• Order processing
• Credit control
• Invoicing
These receivables antecedent functions only as they affect receivables management. Naturally,
there is a great deal more information and detail about these functions, but we will limit the
discussion as noted.
The antecedents are absolutely critical to the management of the receivables asset. They directly
impact the quality and collectability of the asset and are the key driver of the cost to manage a
company’s revenue stream. A simple formula to illustrate this point is:
High customer satisfaction + Accurate invoice = Excellent receivables results
This formula holds true even if the core receivables management functions (i.e., credit control
and collections) are lacking. Excellent order fulfillment drives high customer satisfaction. In
combination with accurate invoicing, the cost of delinquency, concessions, and management of
the receivables asset can be dramatically reduced. When competent credit control and
collections are added, the total receivables management benefits are maximized.
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QUOTATION / COSTING
Quotation is the process of extending a formal offer for a product or service to a prospective
or existing customer. A clear, complete quotation lays the foundation for excellent fulfillment of a
customer order and accurate invoicing.
The two key attributes of a quotation that promote excellent receivables results are:
1. Feasibility/deliverability of offering.
Do not quote something you cannot deliver. The product or service quoted must be able to be
delivered by your firm and perform as sold. If not, the customer will be dissatisfied with the
product/service and withhold payment of your invoice
2. Clear commercial terms and conditions agreed by both parties.
The six elements of a quotation that affect receivables results are:
 The unit and total price (clearly stated including all discounts)
 Applicable sales or use tax
 Freight/delivery (actual versus allowance, who pays it)
 Payment terms (when is payment due?)
 The timing of issuing the invoice (upon shipment, at the start or completion of a project, on
reaching a milestone)
 Description of product or service offered (product number layman’s description, proper or
trademarked product name).
CONTRACT ADMINISTRATION
From a receivables management perspective, contract administration is all about charging
the correct price on the invoice. Price discrepancies are the leading cause of disputed invoices,
which result in delayed payments, short payments, and substantial rework. The concept is
simple; in practice it is much more complex and difficult.
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Contracts are used for larger customers who will receive frequent shipments of products
and/or delivery of services over a period of time and are looking to ensure supply and receive
the lowest price. Infrequent customers are usually served via individual orders covered by their
written, electronic, or verbal purchase order. Contracts govern the commercial terms and
conditions of the orders (or releases against the contract) that are received during the time
period in which the contract is in effect. As we said in the “Quotation” section, it is vital that the
contract clearly define the agreed commercial terms and conditions concerning:
 Price
 Sales and use tax when applicable
 Freight/delivery charges
 Payment terms
 Invoice timing
 Clear description and specification of product and/or services
 to be delivered
 In addition, the time period covered by the contract must be specified.
a)
The commercial terms and conditions in a contract must not only be clear but agreed to by
both buyer and seller. Otherwise, invoices will be disputed. A contract signed by both
parties is proof of agreement.
b)
Ensure the contract is in force. The absolute Best Practice is to have an “evergreen” or
automatic enewal/extension clause in the contract, which keeps the contract in force until
either party formally cancels it.
c)
The timely renewal of contracts is a universal challenge. The Best Practice is to:

Use a system tool (contract administration software application) to track all contracts
and their start and expiration

dates. The tool should proactively notify those responsible for renewals when a contract
is approaching its expiration date.
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
Start the renewal process 90 to 120 days prior to contract expiration, with early and
frequent customer contact.

Establish a clear policy governing transactions with customers whose contracts have
expired. The policy should specify the pricing of such transactions (e.g., should a
noncontract price be charged, or should the contract price be used for a grace period?).
Customers should be notified of this policy when contacted to renew their contract.

Employ a clear escalation procedure involving senior management for contracts fast
approaching the expiration date.

The procedure should involve sales management to pursue the renewal revenue, but also
clearly stipulate the conditions

of selling to the customer beyond the expiration date (i.e., prices, terms, etc).

In addition to being in force, the commercial terms and conditions have to be kept up to
date. Many contracts have provisions
for changing prices during the term of the
contract. Prices of manufactured goods such as paper and petrochemicals are tied to the
commodity market price of key raw materials. Prices of distributed products are often
tied to the acquisition cost of the distributor.
d)
Manage the work flow and backlogs to ensure the contract system is current and accurate.
The major problem we have seen over the years is a backlog of new or renewed contracts
awaiting input into a company’s contract system. This is especially true when a large
portion of the contracts expire on the same date (most commonly, December 31). This
workload peak can be mitigated by staggering contract expiration dates more evenly
throughout the year.
e)
A second frequent problem is a backlog in inputting price changes into the contract system.
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f)
For both of these backlog problems, our recommendation (in addition to staggering
expiration dates) is to allocate more resources to keep the backlogs to a one- to two-day lag.
Remember, every invoice that is generated off an incorrect or expired contract will likely be
disputed and result in decreased cash flow, rework, and diminished customer satisfaction.
The cost of delay is huge and, in most cases, will exceed the cost of a little temporary help.’
PRICING ADMINISTRATION
Price discrepancies are the leading cause of invoice disputes. This is not surprising when you
think of all the pricing incentives and promotions offered to give a company a competitive
advantage and/or to affect customer buying behavior. Examples of pricing mechanisms
designed to alter buying behavior are:

Shifting orders from a busy season of peak demand to a slow Season

Increasing individual order or shipment size

Increasing total volume purchased within a specified time period and so on.
Many of these pricing incentives overlap and can be quite complex, causing confusion among
the supplier’s pricing and billing staff and the customer’s accounts payables and procurement
staff. System tools may not be able to accommodate complicated pricing schemes and
accurately price invoices. Unfortunately, the results can be very damaging.
Best Practices
Pricing accuracy is possibly the most important determinant of receivables management
success. It is a science in and of itself. However, here are seven fundamental practices that
promote pricing and invoicing accuracy:
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1. Keep your pricing scheme as simple as it can be. This may not be possible if your competition
offers complex pricing incentives.
2. Ensure all products and services offered have a discrete product (aka, stock keeping unit [SKU])
number, and a price assigned to it in the pricing matrix or master.
3. As stated in the “Quotation” and “Contract Administration” sections, ensure the multiple
elements of the price are clearly articulated to both the customer and your internal staff.
Six elements of the price are:

List or base price for the SKU

Applicable discounts

Freight terms

Payment terms (including prompt payment discounts) and

billing timing

Applicable sales and/or use tax

Late payment fees (finance charges)
4. Ensure all elements of the pricing master and individual customer price schedule are up to date
and in force (i.e., not expired).
5.
Ensure promotional pricing is adequately controlled; that is, all promotions are authorized and
communicated internally and externally prior to effective date. Utilize off-invoice pricing where
possible, so the net price to the customer is clearly stated on the invoice
6. Ensure all price changes are communicated well in advance of the effective date and that all
contracts and price schedules are similarly updated
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CREDIT CONTROLS
The objective of credit controls is to manage the risk inherent in the extension of credit to
promote sales. This risk is known as credit risk, and is the same risk incurred by lenders of
money, such as banks. A company that sells only on cash-in-advance or cash-on-delivery terms
and requires a secure form of payment has no credit risk. However, unless that company has a
product or service that no one else offers, its sales will be much lower employing those terms of
sale. The global marketplace runs on credit. Goods and services are routinely delivered with the
expectation that payment will be made according to the agreed payment terms.
Credit risk has two dimensions. The first is the risk that payment will never be made. This loss
is known as bad debt. The second risk is that payment will be made late; that is, beyond agreed
payment terms. This loss is known as delinquency. It is considered a loss on the basis that a
company will have to borrow money and pay interest to replace the funds not received on time.
Naturally, bad debt loss is the more devastating of the two losses and the risk that receives the
most management attention. The high-profile bankruptcies of the past several years (Enron,
WorldCom, Kmart, Fleming, etc.) have driven this reality home to thousands of suppliers. It is a
constant threat. During the years 2000 through 2003, between 35,000 and 40,000 companies
filed bankruptcy each year.
The critical task to managing credit risk is to balance the need for credit sales, and the profit
earned on those sales, against the perceived risk of extending credit to a customer. There is no
easy answer or magic formula for balancing these factors. The proper balance varies by
individual company and is based on a firm’s profit margins, strategic goals, and whether a
product can be repossessed and resold. There are many techniques and tools to investigate,
evaluate, and monitor credit risk; however, balancing that risk against the other company
priorities is unique to each firm, requires judgment, and is never easy.
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Best Practices
The Best Practices address managing credit risk for both domestic and foreign customers. They
will discuss establishing and maintaining credit limits, ongoing controls, credit insurance, and
other useful tips for managing credit risk.
Credit Limits
Credit limits quantify the dollar amount of risk a company is willing to bear with an individual
customer. It is analogous to the size of a loan or line of credit a bank would extend to one of its
customers. In principle, it is a “line in the sand” beyond which the risk is intolerable.
Establishing Credit Limits for New Customers
A credit investigation is necessary to establish a credit limit for a new customer. Best Practices
for establishing credit limits for new customers are:

Start with a credit application from the customer to your company requesting a credit
account.

Investigate the applicant’s credit. If it is publicly held, research its financials on EDGAR,
the applicant’s Web site, or other service. In many cases, the investigation will end here, as
the financials will provide sufficient information.

If additional information is needed, secure payment, default, litigation, Uniform
Commercial Code (UCC) filing, lien, and related information from a commercial credit
information provider such as Dun & Bradstreet, Experian, and so on. The industry chapter
of the National Association of Credit Managers (NACM) also provides reliable payment
history information. Online, electronic (versus hard copy) receipt of this data is Best
Practice.
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
If you are unable to establish a credit limit with the above sources of information, proceed to
check the trade and bank references. This is the reason these references are requested on the
credit application. In many cases, you will not need to research these sources, but it is
important to have them available when needed. Best Practice dictates that the credit
investigation proceed only as far as needed to determine a credit limit. It is inefficient to
investigate all information sources if a decision can be reached with one or two sources.

Evaluate the information and assign a credit limit and a date the limit expires or is to be
reevaluated. Best Practice evaluation uses a quantitative credit scoring or risk rating model.
The credit score translates into a predetermined range of credit limits. The model can be an
in-house model or a model offered by a credit information service. Best Practice credit
scoring utilizes automated input of credit information and automated scoring with a
calculated credit limit. There is always an option to modify an automatically calculated
credit limit with human judgment The credit scoring/evaluation to establish a credit limit
should weigh these factors:

Financial strength (financial ratio analysis).

Exposure calculated by the sum of estimated monthly sales and customized inventory to be
held for the customer, multiplied by the payment terms. The exposure to any related parties
(e.g., corporate parent/child relationships) must be added to aggregate total exposure to an
entity.

Payment history with other suppliers as reported by credit reporting service.

Presence or absence of litigation, referrals to collection agencies, liens, UCC filings,
judgments, and so forth.

Profitability of sales to customer.
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ORDER PROCESSING
Overview
Order processing is all about fulfilling a customer order properly, quickly, and invoicing it
accurately. This creates a happy customer, and sets the stage for a prompt, full payment. Failure
to fulfill and bill an order accurately guarantees a delayed and/or short payment, a dissatisfied
customer, and the extra cost of reworking the order, processing a return, issuing a credit,
reinvoicing, and so on. In other words, a minibusiness disaster. The longer-term effect is to
drive customers to the competition, which will fulfill and bill their order properly.
Order processing refers to the function of receiving a customer order, ensuring it meets the
conditions of an acceptable order, and routing it within the company to be fulfilled. Speed is
important, but filling the order to meet customer expectations is the primary mission and a
determinant of the success or failure of a business.
Best Practice
Best Practice in order processing is to receive customer orders electronically (via Electronic
Data Interchange [EDI] or other electronic means) and to route them electronically to the
department within the company that will fulfill it. For a manufacturer or distributor of a tangible
product, the order processing would automatically check inventory records for availability and
print a pick list, packing slip, bill of lading, and so on, to enable the order to be prepared and
shipped. For a services firm, it would involve assigning the order to a staff member to schedule
to 38 Accounts Receivable management Best Practices provide the service. Automatic routing
eliminates the possibility of human error in transcription of the order for routing to fulfillment.
Before an order can be routed to fulfillment, it must be reviewed to ensure it meets the
conditions of an acceptable order. Such conditions are elements such as:
• Price
• Freight terms (which party pays freight)
• Payment terms
• Delivery or completion date
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If the order does not meet the acceptable options for these elements, an exception must be
approved, or the customer must be notified of the unacceptable element of the order. Here
again, Best Practice prescribes automatic reviews of orders and automatic routing of
unacceptable ones to the proper approval authority.
Once the elements of the order are approved, the credit status of the customer must be checked
before the order is released for fulfillment. If the customer’s credit status is unacceptable, the
order is placed on “credit hold,” Best Practices for which were discussed in greater detail in the
“Credit Controls” section.
Another condition of fulfilling an order is the validity of the order. In theory, it must be a bona
fide order from an individual at the customer authorized to place orders. The customer often
accomplishes this by placing a purchase order, which is a legal commitment to accept and pay
for the order if it is satisfactorily fulfilled. Best Practice prescribes electronic placing of orders
or releases of shipments against bulk or blanket purchase orders (usually through EDI). In the
fast pace of commerce, many orders are placed via phone or e-mail, and only experience with
each customer will determine if those orders are valid.
Whatever form the order takes, it must have this information to be a valid order and to be
fulfilled properly:
• A purchase order number. Most companies will not pay an invoice unless it references a valid
purchase order.
• Aclear description of the product or service ordered.
• Payment terms.
• Freight terms.
• Delivery date.
• Price.
• Quantity of product or service ordered.
The advantage of blanket purchase orders is that all of these elements are specified, and only the
release quantity needs to be specified each time.
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Once an order is deemed acceptable, it is routed to the appropriate fulfillment department within
the company, where it is fulfilled, then invoiced. It is critically important that all the
specifications of the order are received accurately and routed accurately, so the customer will be
billed accurately. Best Practice prescribes electronic communication of this information to
minimize transcription errors.
INVOICING
The purpose of presenting an invoice (also called billing) to a customer is to secure payment for
having provided a product or service (or as a deposit on the future provision of a product or
service). The invoicing function in many companies is highly automated, requires little manual
intervention, and is often overlooked. However, invoicing accuracy is the single most important
determinant of effective and efficient receivables management.
Accurate invoicing has been the central theme in our discussions of the quotation, contract
administration, pricing, and order processing functions. Accuracy in billing cannot be achieved
unless the aforementioned functions are performed properly.
Accurate invoicing directly drives:
• Lower receivables delinquency and increased cash flow
• Reduced exposure to bad debt loss
• Lower cost of administering the entire revenue cycle
• Fewer concessions of disputed items
• Enhanced customer service and satisfaction
In fact, many customers, in rating their vendors, measure invoice accuracy. The reason is that
inaccurate invoices raise their internal cost of paying bills and, therefore, are part of the total
cost of buying from a vendor.
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The two key objectives of invoicing are accuracy and speed. Accuracy is defined as meeting the
customer’s requirements for timely payment of an invoice. Companies often complain how
difficult it is to conduct business with government agencies or with large, bureaucratic
companies, citing slow payments. While it is true that accurate invoices are sometimes lost or
paid slowly, the predominant cause of delinquent receivables from this type of customer is
failing to meet their invoicing requirements. Often a government agency or large customer’s
invoicing requirements may be different from the majority of customers. You may feel that the
requirements are outdated, unnecessary, or arcane, but in
order to receive timely payment, they must be met. Even if customized processing is required to
generate an invoice that meets requirements, it is usually worth the extra expense, especially
since you will end up producing a “customized” invoice in the resolution of a dispute
Speed is defined as presenting an invoice to the customer as soon as permissible under the terms
of the business agreement (usually after shipping a product, rendering a service, or achieving a
milestone). Invoice presentation can be accelerated by electronic presentation. Many companies
begin the countdown to the due date on receipt of the vendor invoice, so speed of invoicing is
critical to maximize receivables asset turnover. Speed, however, is less important than accuracy,
as an inaccurate invoice will typically delay payment by several weeks.
An accurate invoice will usually be paid by the customer around the due date with no further
effort or perhaps one collection follow-up reminder. An inaccurate invoice will generate at least
one collection followup, then an investigation into the dispute, resolution, and correction via
issuing a credit memo. Resolution of an inaccurate invoice will require much more time and can
impact several individuals. The cost of issuing a credit memo is estimated at $100 to $200; the
cost of an invoice is only several dollars. In addition, there is the interest cost of receivables
delinquency of the inaccurate invoice.
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Best Practice
There are five Best Practices for order processing.
1. The compilation of the correct information to trigger and populate
an invoice is specific to the system application used for
Receivables Antecedents 43
order processing and billing. For our purposes, it is sufficient to
note that the system gathers information from the contract, pricing,
customer master, shipping, time/service expense, and other
files to generate an invoice. Best Practice is for the invoice to clearly display this information:
• Bill-to address: customer company name, address.
• Bill-to approval authority (where applicable) or department (accounts payable) at the customer
to whom the invoice must go.
• Ship-to address.
• Invoice number and date.
• Customer account number.
• Vendor federal tax identification number.
• Customer purchase order number.
• Date product shipped or service delivered.
• Vendor internal sales order number.
• Quantity and description of product or service delivered. (This must appear in layman’s terms and
not be engineering jargon or abbreviations. Remember, an accounts payable clerk is going to
determine if the invoice is for the product/service ordered on the PO.)
• Unit price(s).
•
• Discounts (price only, not prompt payment discounts).
• Freight and sales tax if applicable.
• Total amount due.
• Payment terms.
• Due date.
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• Remittance address (post office box or lockbox for regular mail, street address of lockbox for
courier deliveries, and bank information for wire transfers and other electronic payments).
• Phone number (and/or name) of person to call if the customer has a question about the invoice,
with phrase “Questions about this invoice should be directed to. …”
• Tear-off remittance portion, with instructions to include invoice number, amount paid for each
invoice, customer account number, how to pay with a credit or procurement card, a change of
address section, and any Optical Character Readable (OCR) number or bar code for scanning.
Also include a request to return the remittance portion or list the information on the check or
electronic payment.
• Boldface message in large font, stating “Please pay $xxxx.yy” by month, day, year.”
• Offer of prompt payment discount (if any), phrased: “Save $xx.yy if payment received by
discount month, day, year.”
• Late payment fee/finance charge statement.
• Attachments as required by customer.
• Invoice should have a header similar to vendor company letterhead, showing name, address, logo.
• The phrase “Original Invoice” should appear on the invoice. To ensure your invoice is easy to
handle, put yourself in the shoes of the accounts payable clerk who has to review the invoice and
match it to a PO and receiving document. The invoice should be clear, easy to read, highlight the
most important information, and convey a message of what action you want (i.e., pay in full by
specified date to lockbox).
Best Practice is to present invoices electronically (Electronic Data Interchange [EDI], Electronic
Invoice Presentation and Payment [EIPP], or other electronic means), to bill as quickly as
possible, and to ensure it is accepted by the customer. If a customer claims not to have received
invoices, it is prudent to check the electronic confirmation of receipt with a phone call to the
customer to ensure the invoices were routed to the proper department within the customer.
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3. Unbilled receivables are receivables where the service or product has been delivered, the
revenue has been recognized, but the invoice has not been generated. Best Practice is to
minimize unbilled receivables. Receivables management is rife with uncertainty. When an
invoice is delivered to a customer, it is not completely certain if it will ever be paid, and it is
very uncertain when it will be paid. However, there is no uncertainty with unbilled
receivables. They will never be paid.
Correcting inaccurate invoices is usually accomplished four ways:

Issuing a credit memo for the incorrect amount

Instructing the customer to short pay the invoice, then processing an adjustment for the
difference

Issuing a corrected “original” invoice, that is, an invoice with the same invoice number as
the original, incorrect one

Issuing a credit memo for the entire amount of the inaccurate invoice, and rebilling the
correct amount under a new invoice number
4. Best Practice is ultimately to correct an invoice in a manner acceptable to the customer that
will result in the correct amount being paid as early as possible. Best Practice is also to try
to influencethe customer to correct the inaccurate invoice in the manner that is the least
work for you. This can be accomplished by offering your preferred resolution to the
customer. Option b above is the simplest way to correct an inaccurate invoice, although
there are audit trail risks, and the adjustment may not be recorded accurately in the
accounting records. Option a is the cleanest from an accounting and control perspective, but
involves creation of a credit memo. Options c and d can involve confusion over invoice
numbers and original invoice dates.
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5. Best Practice also includes improving invoicing accuracy on a continuous basis. As stated
earlier, the rewards of accurate invoicing are enormous, and as business changes, new
sources of error will continually arise. A formal program of improving billing quality using
Six Sigma, Total Quality Management, or other methodology is an integral part of Best
Practice in receivables management. Utilization of dispute and/or credit memo causality data
is essential to direct the continuous improvement efforts, and to measure the progress.
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Receivables Asset Management
Management of the receivables asset begins when all of the antecedent functions are completed
and a receivable is posted to the detailed accounts receivable ledger (a comprehensive list of all
amounts owed the company). The receivables begin aging immediately, increasing the cost of
financing them and increasing the risk of nonpayment. Now what?
Management of this asset (which is one of the largest assets of the company) involves
safeguarding the asset and accelerating cash inflow (increasing asset turnover). If you view this
asset as a vault of cash, think of the precautions a bank takes to protect its cash reserves.
However, receivables are much more fluid and an integral part of doing business, so the
safeguarding and acceleration of turnover must be accomplished:
• At low cost
• Without strangling sales volume
• Without alienating customers and colleagues.
This chapter presents Best Practices for achieving this difficult task.
PORTFOLIO STRATEGY
Overview
An old joke provides insight into how to manage a receivables asset. The joke starts with the
question, “How do you eat an elephant?” The answer: “One bite at a time.”
A receivables portfolio strategy defines the approach to managing the receivables. It answers
the question, “How am I going to manage this asset?” It starts with breaking the entire asset into
“bite-size” pieces. It is absolutely essential to know the size and makeup of a receivables asset
(or portfolio) before you can design a strategy and marshal the required resources to manage it.
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Best Practices
Developing a portfolio strategy is a step-by-step process.
STEP ONE—Analyze the Size, Composition, and Complexity of the Receivables Portfolio.
To illustrate, consider two different receivables portfolios, each with a value of $1 billion. An
aircraft manufacturer like Boeing could have 5 customers and 8 to 10 open invoices for aircraft
(excluding spare parts and service revenue invoices for simplicity’s sake). A food distributor
such as Sysco could have over a million customers and tens of millions of open invoices. A
vastly different portfolio strategy is required foreach of these two portfolios. Begin the analysis
by examining:
• The number of customer accounts.
• The number and value of open line items inclusive of invoices, credit memos, unapplied
payments, and other debits and credits.
• The concentration of receivables. Is a large portion of the value of the portfolio controlled by a
relatively few accounts? Often you will find that the Pareto principle (the 80/20 rule) applies; that
is, 80% of the receivables are controlled by 20% of the customers. The degree of concentration
has critically important implications for how the asset is best managed.
The complexity of the receivables portfolio is a function of two major factors:
1. The complexity of the business and the vulnerability of its invoices to dispute by customers.
An illustration of this concept is to contrast an invoice for a shipment of copier paper to an
invoice for the completion of a consulting project milestone. The copier paper invoice is
subject to dispute for quantity, price, or damage/quality. The consulting invoice is vulnerable
to a very subjective interpretation of whether the milestone was achieved, and the time,
consultant and customer work hours required, overall satisfaction with the engagement, level
of travel expense, and so on. The consulting business has a much higher complexity, and
therefore it is more difficult to manage the receivables asset.
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2. The level of “clutter” in the portfolio. Clutter is defined as all types of open transactions
except whole open invoices. Clutter transactions include:
• Short-paid invoices (deductions)
• Credit memos
• Unapplied payments
• Unearned discount chargebacks
• Late payment fees (finance or service charges)
• Other chargebacks, billbacks, or debit memos
• Other adjustments or credits
The reason clutter increases complexity is that it obscures the true amount owed by the
customer, can confuse the customer, and/or precipitates dispute over the amount owed. In
contrast, the collection of a whole, open invoice begins as a simple collection contact. An
underlying dispute may be identified, but often the contact revolves around when the invoice
will be paid, not if and how much. However, dealing with clutter requires significant time and
discussion trying to establish the amount owed, not when it will be paid. Often it triggers
additional research and provision of documentation before the topic of when payment will be
made is even broached. Clutter increases the difficulty of collection.
Exhibits 3.3 and 3.4 illustrate the clutter concept. Note the number of clutter transactions in
these two portfolios. Every one of them will have to be cleared from the ledger at some point.
How much time and effort will be required? Inevitably, it will be a lot more than the time and
effort required to clear the whole open invoices. The portfolio in Exhibit 3.3 is relatively simple
to manage. Most of the open transactions are large, whole open invoices, with modest amounts
of clutter. Matching and clearing of the unapplied cash would clear many open invoices and
make the task of managing the portfolio easier.
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STEP TWO—Segment the Portfolio.
The portfolio can be segmented according to a variety of attributes:
• Size of customer determined by sales volume or open receivables
• Private versus public sector
• Domestic versus foreign based
• Line of business or division
• Open account versus cash on delivery or letter of credit
• Risk rating or payment history
• Type of customer: distributor/dealer versus end user.
• Alignment with sales force
• Geography or time zone
• Profitability
The key criterion to determine how to define a segment is to answer the question: Does the
segment as defined merit a tailored approach to managing its receivables? If the answer is yes,
then a segment should be defined.
What do we mean by a “tailored approach to managing the receivables”?
It is unwise to treat all customers the same. Customers vary in importance to your company, in
how they operate, and their relative risk vs. profitability. Here are some examples
You would not treat Procter & Gamble (P&G) the same way you would treat a small, start-up
organic soap manufacturer. You would make more frequent collection calls with the start-up
and withhold shipments as needed. The approach with P&G would be to work with it to
maintain the account, communicate mostly by e-mail, and rarely, if ever, even consider holding
shipments.
• You would be more willing to bear risk with a highly profitable customer than with a marginally
profitable customer.
• The approach to a large retailer would be focused more on processing deductions than pursuing
past due open invoices.
• The communication path for a customer where invoices require a signature approval in lieu of a
receiving document (for a service) would be different from a customer who matches the invoice
with a receiving document (for a tangible product).
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• The approach to a government customer would be different from a private sector customer.
STEP THREE—Formulate an Approach for Specific Segments.
Once the segments are defined, then formulate an approach or strategy for effectively and
efficiently managing the receivables owed by that segment. The approach will define the amount
of effort, resource, and tools required and the required skill sets of the staff. For example, if
Segment 1 is thousands of small, thinly capitalized but moderately profitable customers, the
strategy may entail:
• High volume of automated, progressively more stern collection letters
• High volume of collection calls firmly stressing the need to pay quickly to avoid service
interruption Automated order and shipment hold when credit limit or delinquency thresholds are
violated
• Low-resource, low-cost receivables management
This segment should be managed to minimize bad debt loss. The collector skills required to
manage this segment are the ability to make a very high volume of effective collection calls each
day. The ability to reconcile customer accounts and handle disputes is much less important.
For another example, Segment 2 consists of a few very large, very creditworthy customers who
account for a substantial portion of total revenue and profit. Here the strategy might entail:
• An account maintenance approach to collection, providing supporting documentation (invoice
copy, proof of delivery) for skipped invoices
• Friendly reminders on past due invoices
• Prompt, high-volume deduction processing
• Frequent account reconciliation and cleanup efforts
• Periodic face-to-face meetings with purchasing and accounts payable
• Higher levels of customer service, and a higher cost to service and maintain the account and the
relationship
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• Order holds only by exception in extreme circumstances This segment should be managed to
generate maximum cash flow while controlling deduction and concession losses. A significant
slowdown of payments from this customer segment will have a major impact on the firm’s cash
flow. The collector skills required to manage this segment are a thorough understanding of
customer accounting, account reconciliation and maintenance, deduction and adjustment
processing, document retrieval, and the ability to establish a good working rapport with customer
payables staff and with internal sales staff.
COLLECTION PROCESS
Overview
The collection process executes the portfolio strategy for each segment. To achieve best results,
the collection process should vary by segment. Examples of how the process can be varied
were presented in the preceding section.
Best Practices
While elements of the collection process should be tailored to each portfolio segment, there are
tools and techniques that are common to all or most segments.
Collection Timeline
The starting point for the collection process of each segment is the collection timeline, also
known as an escalation protocol. The collection timeline defines which steps are taken at which
points in time and by whom in both:
• The normal collection process
• The increasingly severe actions that will be taken with a customer who is seriously past due
It is important that this timeline is agreed to by all of senior management, so that when it is time
to invoke its more severe remedies, sales, general management, and finance present a united
front to the customer.
Exhibit 3.6 is an illustration of a collection timeline.
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Customer Contact Timing
The timing of customer contact is an integral part of the collection process. The general rule of
thumb for collection contact is: More (contact) is better than less, and earlier (contact) is better
than later. Prompt enforcement of payment terms is a Best Practice that improves results (cash
flow, bad debt exposure, etc.) and educates customers of your expectations. A good basic
posture is to expect every penny to be paid by the due date. In reality, that will not occur, but it
is a good way to approach the management of the receivables asset.
Prompt enforcement means calling on large accounts three to four days past the due date. Even
terms of “due upon receipt” or “net 7 days” can be managed this way. Many collection
departments concede 30 days on these payment terms. It is true that an increasing number of
companies have set minimums of 30, 45, or 60 days for paying invoices. Securing exceptions
for your firm is difficult and usually requires senior management involvement. However, for
customers without ironclad rules, if “due upon receipt” and “net 7 day” terms are pursued with
an expectation they will be paid in the next check run, 20 to 30% of these invoices can be paid
in significantly less than 30 days. This can have a substantial impact on the overall receivables
management results. Another Best Practice for collection contact is proactive collection contact;
that is, calling the customer prior to the due date. The major benefit of this approach is to
identify problems with an invoice prior to the due date, in the hope they can be resolved quickly
and payment received within terms. The classic example of this is the customer’s accounts
payable group not having the invoice. An invoice can be sent in a few minutes. Why wait for an
invoice to be 5 to 10 days past due before finding out the customer does not have it? If this
problem is identified and resolved 10 days prior to the due date, it is highly likely that the
payment will be received within terms.
The basic principles of proactive collection contact are:
• It is customer service–oriented, to promptly identify and resolve any discrepancies with the order
fulfillment or invoice. If no problems exist, inquire if the invoice is scheduled to be paid by the
due date.
• It occurs prior to the due date, so resolution can be effected to ensure that payment can be received
by the due date. It also educates the customer that you are serious about enforcing your payment
terms.
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• It is still a collection call. Ask for the payment on the due date.
Proactive contact should be focused on large balance accounts, as it is more time consuming
than a “straight” collection call on past due invoices. Some customers will balk at answering
questions about invoices not yet past due. One way to overcome this objection is to point out the
desire to service and maintain the customer’s account and to help resolve any problem.
Resolution starts with identification. Some will be strongly resentful and may have to be
exempted from proactive contact. A good way to start proactive contact is to call customers
with some past due invoices. Inquire about the past due invoices first, then inquire about a few
large individual invoices that will become due within 10 days. Over time, proactive contact can
be expanded to the majority of the large accounts, addressing large invoices 10 to 15 days from
the due date. Ultimately, the goal is to migrate to a total account management approach,
reviewing past due and almost due invoices, as well as any “clutter” that needs to be cleared.
A suggested script for proactive collection contact is:
• Have you received the invoice?
• Is it in order?
• When is it scheduled for payment?
• If acceptable, confirm the commitment to pay on a specific date. If not, try to get it advanced
so it will meet the payment terms.
Customer Contact Methods
The most effective method of customer contact is made via telephone, which can elicit a timely
or, it is hoped, immediate response. Once you have the proper person on the phone, you are well
positioned to secure a commitment to pay or determine the reason for nonpayment. In our
experience, e-mail is a very effective method of communicating with accounts payable
departments. Many people respond more promptly to e-mails than voice mails, and the e-mail
message is much better at conveying invoice numbers, amounts due, and so on.
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Collection letters have limited effectiveness. They are best used with low-priority, smallbalance accounts that probably will not receive a call or personalized e-mail. For such accounts,
a collection letter is better than no contact at all. A small percentage of letters do elicit a
payment or report of a dispute. Collection letters also help when escalating action with a
delinquent customer. Strong action is appropriate when it follows repeated collection contacts
that were ignored. It is easier to justify holding orders when you can cite prior collection letters
and calls to the customer. In the final analysis, the justification of collection letters is that they
are better than nothing. With praise like this, who needs criticism?
Since collection letters are of low value, they must be automated to ensure that the time and cost
expended on them is minimal. An experienced, very successful director of customer financial
services at a $2 billion test equipment manufacturer says that he has never seen truly automated
collection letters. They always involve some manual processing.
Truly automated means:
• The system selects customers to receive a letter, excluding customers coded to be exempt from
collection letters (typically, the larger accounts, which receive calls), by reading the delinquency
status and excluding disputed items (and late payment fees and unearned discounts if desired).
• The system selects the appropriate letter based on the degree of delinquency. (The more past due
an invoice, the more urgent tone in the letter.)
• The system prints the letter with an itemized list of delinquent invoices and other charges and
credits. Letters should be phrased in a customer service–oriented manner, but call for prompt,
specific, action: for example, “pay $8756.29 by July 17.”
The letters should prominently display the payment address and specifics for electronic and
procurement card payments, as well as a person’s name and number to call (usually the assigned
collector). Company letterhead should be used.
• The system prints the envelopes.
• There is no human review of the letters. They are simply inserted in the envelopes and mailed
promptly.
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• Collection letters are best delivered via e-mail for greater speed and cost efficiency. Collection
letters should be run at least twice per month to avoid triggering a huge volume of incoming calls,
which can paralyze collection staff members and divert them from focusing on the large dollar
amounts. This is especially true when there is a lot of clutter in the receivables portfolio.
Statements of account are similar to collection letters with these differences:
• They show all open items on a customer account, not just the delinquent ones.
• They should be sent to all customers every month. Part of the mission of receivables management
is to help customers maintain their credit accounts with you in the best possible condition.
Clearing open items, especially clutter items, is an important part of the service provided your
customer. Statements display all open items, enable customers to see the entire account, and
enable them to apply open credits or payments to open debits.
Statements can also save the customer and you a great deal of work if their account is selected for
verification as part of an audit. Sending statements every month also helps justify escalation when
needed.
•
The comments about collection letters concerning automation, delivering a collection message,
providing remittance information, and delivering via e-mail, apply to statements as well.
Customer visits are a valuable tool in developing and reinforcing a positive rapport with the
customer. They should be utilized subject to expense constraints, as they are time consuming
and can involve travel expense. However, visits are entirely appropriate for large and/or
problem accounts.
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Customer visits have two objectives:
1. To introduce or reinforce a business relationship between a collector and the customer’s accounts
payable person
2. To discuss the status of the customer’s account and clearance of open items
Two tools can be used for this purpose:
1. Areconciliation pack of the customer’s account (explained later in this section)
2. An end-of-month account statement
In all cases, the document must be sent well in advance so the customer can prepare a response.
In addition, you must be make it clear to the customer that you expect the research to be
completed before the meeting, so the meeting will focus on resolution and clearing of the open
items.
Customer visits should be conducted by the collector, accompanied by the sales representative.
An invitation should be extended to the collection manager as well.
Preparation for the visit should include thorough review of these materials:
The reconciliation pack or statement sent to the customer along with all supporting
documentation. Items that have cleared should be identified the day before the meeting to save
time during the meeting.
• An up-to-date statement of account.
• A perspective of the customer’s prevailing payment habits (quantified if possible).
• A list of key people in the accounts payable department with their phone numbers.
• Authorization of bargaining power to concede items when necessary.
The meeting itself should focus on agreeing how to clear open transactions on the customer’s
account, whether via payment or adjustment. After the meeting, the collector should send an email or letter thanking the customer for his or her time and summarizing the actions agreed to
by both parties. Then the actions should be initiated as soon as possible to reinforce credibility
with the customer.
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Preparation for Customer Contact
Best Practice preparation for a call or e-mail involves the following steps:
1. Select a customer to contact based on the prioritization methodology (next largest open amount
or high risk).
2. Retrieve the contact name and phone number from your receivables system.
3. Call up that customer’s current account status on the receivables system.
4. Review the status summarizing the total amount due in each aging category, so you can state the
amount past due and amount falling due in your opening remarks.
5. Review the notes of prior conversations in the system to refresh your memory on recent
conversations.
6. Review the last reconciliation pack sent if applicable.
7. Note any clutter transactions (unapplied cash, short payments) you intend to discuss with the
customer.
8. Quickly formulate the request you will make of the customer, and assemble supporting
documents. Display the customer’s account on the computer screen.
9. You are now ready to make the call (or e-mail).
For the preparation of a contact for collecting short-paid invoices:
1. Identify any unapplied cash, credit memos, or adjustments that you believe may apply to the
open transactions so you can secure the customer’s approval to apply.
2. Review the notes of your last discussion of these items and/or any return correspondence.
3. Assemble supporting documentation.
4. Make the call (or e-mail).
Execution of the Customer Contact
To reiterate, customer contact can be made by phone, e-mail, or fax. The preferred method is by
telephone; however, customers’ preference for e-mail or fax, if they respond to it in a timely
manner, is acceptable. It is essential that collection contact be made with a person at the
customer who can produce the desired effect—that is, pay the invoices and provide information
as to their status. The first contact is usually with the accounts payable department.
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The communication should begin by identifying yourself by name, “of the customer financial
services or credit or collection department.”
You should then inform the contact of the reason for the call, stating the status of account
according to your records, confirming that their records agree with the past due invoices, and
asking when the invoices will be paid.
A suggested script (to be modified to fit your own style) is:
“Hello, this is [name] of [company name] calling to discuss the status of your account. Our
records show you have xxx dollars past due and xxx dollars falling due in the next few days. Do
your records agree?” If not, pinpoint the discrepancy to determine if the customer is missing
invoices, disputing invoices, or have deductions to be taken. It may be helpful to send a copy of
a statement of account to facilitate the discussion.
If a customer is missing invoices, provide the customer with a copy.
If invoices are disputed, get complete information about the nature of the dispute so you can
initiate its resolution. If there is a disagreement as to the due date of the invoices, carefully
explain the payment terms and the due dates. If necessary, provide documentation (contract) to
support the agreed payment terms and their interpretation.
The objective is to get the customer to include all invoices that are past due and falling due in
the next payment. (This is known as total inclusion.) The amount paid may be less than the sum
of all the invoices because of deductions, but ensure all invoices are paid.
If the customer agrees with the amount and due dates, secure a commitment as to the date,
amount, and invoices to be paid.
Upon completion of the call, can take these five steps:
1. Enter into the collection notes the results of the contact, including payment date, amount,
check number if available, and a description of invoices to be paid (e.g., “all May invoices”).
Enter your initials, the date, and the name of the person(s) to whom you spoke. Utilization of
standard abbreviations can accelerate this process.
2. Enter into your diary follow-up mechanism the date of the next action (e.g., follow-up on
payment promise).
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3. If appropriate, confirm the agreed actions in writing or e-mail.
4. Fulfill actions you have promised within 48 hours. Initiate resolution actions for any disputes
you have identified within 48 hours.
If you cannot get through and you get voice mail:
• Try calling back two or three times before leaving a message.
• Make follow-up e-mails and faxes after two days if no response received.
Negotiation Skills and Empowerment
Best Practices includes empowering collectors to negotiate and to concede charges during
negotiation. Limits must be placed on the amount that can be conceded. Concessions can also
be limited to late payment fees and unearned prompt payment discounts. However, to achieve
best results most efficiently, a collector must be empowered to write off certain amounts. This
empowers collectors with the customer and eliminates the time required to secure approvals.
Negotiation plays an important role in collections. However, it is not the classic, pure
negotiation that transpires between a willing buyer and willing seller. It is different because:
• The deal has already been agreed.
• The customer has implicitly agreed to the payment terms. You are merely asking the customer
to abide by what has already been agreed.
However, the customer’s ability or willingness to pay may be limited, and that is when
negotiation enters the process.
The seven key steps in collection negotiations are:
1. Prepare by reviewing the status of the account, prior actions and discussions, and what you wish
to achieve.
2. Decide what you will concede.
3. State your opening position; for example, “We expect all invoices to be paid by the due date.”
4. If the customer does not commit to the opening position, propose an alternative, and look for a
willingness to bargain.
5. Bargain using proposals and counter proposals in an “if, then” format. Trade items of low value
to you that may be of high value to the customer. Examples: grant a little more time to pay in
return for releasing orders, paying late payment fees, and so on.
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6. Agree to all conditions.
7. Confirm in writing afterward.
Payment Plans
Payment plans should be negotiated only when the customer cannot pay all the past due amount
within a 30-day time frame. The objectives in negotiating a payment plan are:
• Payments should be of the shortest duration possible.
• Plans should include a high frequency of payments.
• Plan should begin with an immediate payment of a significant amount.
• Secure postdated checks for future payments.
• Include a finance charge for extending the time period for full payment.
Collections staff members should discuss all impending negotiations for payment plans in
advance with the collection manager, whenever possible, to agree with the parameters of the
payment plan. Once negotiations begin, the collector must be empowered to unilaterally reach
an agreement within the agreed parameters with the customer.
All payment plans must be confirmed in writing. In instances where the amount is large and/or
the time period extended beyond six months, a promissory note and/or other security instrument
should be executed. Payment dates must be entered into the collector’s diary followup
mechanism and followed up with a proactive contact before each payment date.
Dealing with Problem Customers
Problem customers are customers that are chronically slow in paying and/or pose a high level of
risk of nonpayment. In addition to the cost of funding the slow payments and the risk of bad
debt loss, problem customers inflict a high cost in servicing their accounts. This cost is reflected
in increased collector time, but also in the time of credit, finance, sales, and executive
management. Imany, Inc., a collection software firm, estimates that problem accounts require
four to five times as much time to manage as nonproblem accounts.1 Given the high actual and
potential cost of these accounts, how are they best handled?
The best way is to do business with them differently. Instead of selling on open account and
then chasing them for past due receivables, sell them on a more restricted basis, such as:
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• Lower credit limit with immediate order hold when the limit is exceeded or a delinquency
threshold is violated
• Shorter payment terms
• Up-front deposit
• Direct debit of their bank account on the invoice due date
• Standby letter of credit
• Cash with order
• Other security devices (guarantees, etc.)
Implementing any of these terms may result in lower sales to problem accounts. This risk of
lower profit earned on the sales must be weighed against the cost, management time, and risk of
bad debt loss of the existing mode of business, and is best made by executive management.
Payment plans (see above) are useful for reining in a seriously delinquent problem customer.
Another useful technique is called “burning the candle at both ends.” Typically, when working
with a problem customer, the focus is on securing payment for the oldest past due invoices first,
then working on the remaining invoices in order of greatest age. Unfortunately, as the oldest
invoices are being paid over a period of time, ongoing shipments begin to age and quickly
become past due. The first rule in dealing with problem accounts is that the amount of payments
must exceed the level of sales, to ensure the total balance is continuously decreasing.
The “burning the candle at both ends” technique involves securing payment for the old invoices,
while simultaneously securing payment for some current invoices. This will reduce the amount
of future past due debt to be dealt with. This technique may not always result in an absolute
greater amount of payments, but often it can. Additionally, it continues the urgency caused by
seriously past due invoices, while decreasing the total exposure. Finally, the escalation protocol
(or collection timeline) prescribes the actions to be taken for a seriously delinquent customer.
When the above-mentioned techniques fail, the escalation protocol must be followed.
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In our experience, many companies hope and wish for improvement with problem customers,
but in most cases, the exposure increases as time advances. Delaying order and shipment hold
usually results in higher exposure and a bigger problem. If substantial improvement is not seen,
and commitments for short-term payments are not secured, it is best to face facts and refer the
account to a collection agency or attorney. These third parties are most effective the earlier they
take over an account. For a number of reasons (credit reporting, experience), they can exert
pressure and achieve results that the supplier company cannot. It is far better to collect a
significant portion of a problem account’s receivable and pay the commission to a third party
than to procrastinate, hoping against the odds, and end up with a large loss. The suppliers that
utilize third parties first usually achieve the best results. If you are the tenth supplier to refer an
account to a collection agency, it has little impact. If you are the first or second, your chances of
collection are much better.
The best way to ensure that the collectors are using the Best Practices is through two primary
actions:
1. Have the supervisor sit with each collector for two to three hours while the collector is
making collection calls. The preparation, execution, and post-call follow-up can be observed
and constructive suggestions for improvement offered.
2. Have the supervisor conduct periodic (weekly is best) portfolio reviews with each collector.
The portfolio review is a review of the status and next steps to be taken with a group of
accounts.
Usually the accounts selected are the larger ones or the problem accounts. It is also a good
practice to select some medium and smaller accounts to test how well the portfolio is being
penetrated.
The portfolio reviews will enable the supervisor to obtain a perspective on how well collectors
move accounts to a satisfactory condition, if their follow-up intervals are too long, how well
they are pushing coworkers to resolve issues, and so on.
Key Points
The six key points to remember about the collection process are:
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1. It is a process and it must be well defined. The collection timeline helps in the definition and
in communicating and explaining it within your organization.
2. It must be supported throughout the organization, not just by finance.
3. It is designed to execute the portfolio strategy and, as a result, should be tailored to the major
segments of the portfolio.
4. Weekly portfolio reviews are essential to achieving top performance from collectors.
5. Proven fundamentals apply to virtually all portfolio segments.
6. More customer contact is better than less. Earlier contact is better than later.
National Accounts Approach
A national account is defined as a large, important customer that provides a significant portion of
total sales and profit. Typically they are large Fortune 1000–size companies, with multiple
locations (or ship-to addresses), and a contract governing the trading. Often they are very
creditworthy. Losing such a customer would be a serious adverse event for a company. The
objective of receivables management for national accounts is to provide premium financial
service to them and to maximize cash flow from them.
In an effort to retain and grow revenue with such customers, companies will provide a premium
level of service. Premium service can take many forms, but in revenue cycle operations, it often
includes some or all of these areas:
• Staff members dedicated to the contract and pricing administration, order processing, and in
some cases invoicing and payment processing of a national accounts customer(s). This
enables the staff members to specialize in the needs and procedures of the customer(s) and
develop a rapport with their counterparts within the customer. Specialized staff members are
often used for government customers that have particular and inflexible contracting and
invoicing requirements. Order fulfillment, invoicing accuracy, and dispute resolution are
enhanced by specialized staff members.
• Enhanced service standards, usually faster turnaround times for order processing and dispute
resolution.
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• Dedicated collectors who utilize a “national accounts” approach to the appropriate customers.
Such an approach is designed to recognize the unique characteristics and value of national
account customers. The approach includes:
• Account maintenance focusing on skipped invoices (providing invoice copies, proof of
delivery, etc.), deduction and dispute clearing, application of open credit memos and
payments, and the overall clearing of clutter.
• Customer service–based “collection” calls for skipped invoices. Such “calls” are often e-mail
messages.
• Prompt deduction and dispute resolution.
• Periodic customer visits to build rapport.
• Use of credit hold only in extreme cases that have been escalated to senior management of
both companies.
• Construction of “payer profiles” that document the approval and payment process of the
customer and information on key contacts in procurement, accounts payable, and finance.
Successful national account administration enables companies to manage large revenue
streams and receivable assets with excellent results.
Conversely, mismanagement of national accounts administration can result in receivables
nightmares that can be disproportionate to the size of the customer. Exhibit 3.7 illustrates how a
national account that comprised 16% of a firm’s revenue and was poorly administered soon
accounted for the lion’s share of receivables problems.
SPECIAL COLLECTION EFFORTS
Overview
Special collection efforts are initiatives focused on narrowly defined objectives. Excellent
management of the receivables asset is a broad objective. Two common examples of narrowly
defined objectives are:
1. Reducing the value and number of seriously aged open items
2. Maximizing cash collections over the next 120 days
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Special collection efforts focus additional resource and management time on their objectives.
By concentrating resources and attention on a limited task, progress can be accelerated and
results improved. Other tasks and duties can be deferred or delayed, while maximum resources
are devoted to the special efforts. Alternatively, additional resources can be deployed to
maintain activity levels in all areas.
Often, special efforts are initiated to solve problems that have built up over a long period of
time and are not being resolved satisfactorily in the normal course of business.
Two special collection efforts directed at common receivables management problems are
described next.
Best Practices
Reconciliation and Recovery
This effort (or program) is directed at substantially reducing the value and number of aged open
items. Often these aged items are defined as 90 to 120 days old, and can be found in the far right
column of the receivables aging report. These receivables are at the greatest risk of bad debt
loss, usually trigger a high level of provisioning in the bad debt reserve, and draw a lot of senior
management and auditor attention.
These items pose a difficult dilemma:
If they were easily cleared, it would have been done before they reached the advanced age. It
will take much time, effort, and cost to try to collect and clear them. However, their
collectability is low, especially if there are many clutter transactions included. So companies are
faced with the prospect of expending a great deal of resources for a relatively small payback. On
the other hand, to just write them off is too costly. If the collection staff is assigned to devote a
substantial portion of its time to work these accounts, cash flow will decrease as the normal
collection effort will be diminished. How can this dilemma be solved?
The answer is a reconciliation and recovery program. A reconciliation and recovery program:
• Identifies customer accounts with a large number of aged, clutter transactions. Customers with
less than eight such transactions and customers with just whole open invoices are excluded
from the program. Such accounts can be handled by the collectors in the normal course of
collections without consuming too much of their time.
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Defines a format for presenting your claim and its supporting documentation to the customer.
The format is called a reconciliation pack, and contains these elements:
• A customer service–oriented cover letter stating that this is a recap of the aged items open on
your records, asking them to review and prepare a response
• A summary of all aged open items by transaction types (i.e., invoice, short payments, credit
memos, unapplied payments, etc.)
• A detailed listing of all open transactions with transaction number, date, and original and
remaining amounts
• Copies of invoices, credit memos, etc.
• Copies of proofs of delivery (POD) if necessary. Sometimes it is more time efficient to
exclude them for all open invoices and await the customer’s request for the missing ones.
• Utilizes high-speed proce dures with decision points for assembling the packs. These
procedures are developed by an expert on staff who can document the fastest, most efficient
method of assembly.
Decision points are used to maintain the cost efficiency focus. An example of a decision point is
if a copy of a one-yearold invoice for a small dollar amount cannot be retrieved, then it is best to
write it off rather than expend inordinate amounts of time searching. Similarly, small clutter
items may be unilaterally written off to reduce the time and expense of reconciliation pack
assembly.
• Utilizes temporarily assigned clerical workers to assemble the reconciliation packs. This saves
collectors an enormous amount of time, allowing them to focus on collections. Assembly of
the packs requires customer accounting and document retrieval skills, which are less costly
than collection skills. In addition, when the program is finished, the resources can be
discontinued.
• Utilizes the collector as the person to discuss the pack with the customer and drive collection
and clearing of all the aged open items. This is often accomplished with a face-to-face
meeting.
The organization of a reconciliation and recovery program should follow these seven steps:
1. Compile the list of customer accounts for which a reconciliation pack is to be prepared.
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2. Document the contents and format of a reconciliation pack and the high-speed procedures for
assembling it.
3. Estimate the time required for retrieval for each type of transaction (e.g., invoice, credit
memo, unapplied payment, etc.) and for the assembly of the pack. Estimate the time required
to assemble a pack for each customer on the list.
4. Calculate the number of clerical staff required to assemble all the packs in the desired time
frame. It is always wise to plan on more staff, especially if temporary workers are used to
insulate against their frequent turnover.
5. Assemble and train the reconciliation team, and designate a supervisor who will answer
questions and drive results. An internal staff member is a good choice here, as his or her
familiarity with the company and its systems will be valuable in guiding the temporary staff.
6. Assign and schedule the completion of the packs among the reconciliation staff.
7. Track the progress of the program on a weekly basis, noting specifically:
a. The actual completion of packs versus the schedule
b. The actual follow-up of the packs with the customer by the collectors
c. The progress in clearing the aged items, differentiating between cash and noncash
(adjustments, write-offs) reasons for clearing
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